Credit cards are issued by financial institutions that must adhere to federal laws and the laws of states in which they operate. "Operate" refers to any state in which the credit card company is authorized to issue credit cards. Credit cards can, and typically do, provide their credit lines at rates that exceed states' legal interest rates and the usury rates. Credit card rates are only capped in those states with laws that explicitly address credit cards.

Usury Description

"Usury" refers to charging interest rates at rates that exceed lawful rates. Usury laws can be complicated, but for most states "lawful" refers to interest rates that banks can charge under specific conditions. Numerous exceptions apply and many states place no upper limit on what constitutes usury. Because so many exceptions exist, those states that do establish upper limits on usurious interest rates often levy severe penalties on those entities, including credit card companies, that violate those laws.

Retail Exemptions

In the vast majority of states, usury laws regarding interest rates only apply to loans. Retail installment contracts -- for example, layaway plans and six-month-same-as-cash offers -- and revolving accounts are not considered loans. They are considered "time payment contracts." States generally place no limits on retailers for the finance charges they assess for household and personal goods and services.

Time Payment Contracts

Financial institutions issue third-party credit cards -- MasterCard, Visa and Discover -- and do not have the same level of control over those cards as they do their own loans. In addition, many retailers offer revolving accounts to their customers using cards issued by these same financial institutions. For example, Home Depot and Staples issue their store credit cards through Citibank. Therefore, banks and credit card issuers take the position that credit cards fall under the definition of "time payment contracts," not loans, and are therefore exempt from usury laws.

Specific Laws

Only those states that specifically place limits on credit card interest rates or time payment contracts have relevant usury laws. Most credit card issuers, in the fine print of their applications, mention those states. According to the American Bankers Association, 21 states and the District of Columbia cap the interest rates on credit cards. However, most financial institutions can circumvent the laws in these states by locating their credit card issuing subsidiary headquarters in states with no interest rate limits, for example, South Dakota and Nevada. A 1978 Supreme Court ruling essentially allows credit card issuers to export their interest rates from their headquarter state to any other state.

About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.